Alternative economic framing

Oct 11, 2011 – Newspapers mostly reflect “conventional” economics, whose textbooks describe variations on the “classical” market economic model, and little else. (Some of the more risqué texts might devote a page to Marxism, but that’s the only alternative we’re supposed to consider). Economics is framed as capitalism vs socialism. (Cognitively speaking, there’s a “good” reason for this limiting dichotomy – but I’ll save that for a future piece).

John Lanchester, in his excellent economics primer, Whoops!, argues that the global financial collapse stems from the perceived victory of an ideology (“capitalism”): “That climate was one of unchallenged victory for the capitalist system, a clear ideological hegemony of a type which never existed before: it was the first moment when capitalism was unthreatened as the world’s dominant political-economic system.”

So, a dichotomy framed as a battle with a clear winner. The financial sector, given “free reign” (as well as “free rein”), became more powerful than ever. This is illustrated by Simon Johnson, a former IMF chief economist:

“From 1973 to 1985, the financial sector never earned more than 16 percent of domestic corporate profits. In 1986, that figure reached 19 percent. In the 1990s, it oscillated between 21 percent and 30 percent, higher than it had ever been in the postwar period. This decade, it reached 41 percent”. *

The financial sector rules – like “a class of priests and magicians”** – by instilling incomprehension and awe (even “experts” apparently can’t agree on many of the basics). In this milieu it’s safer for journalists to use conventional “accepted” economic frames – there’s less risk of exposing one’s ignorance. Alternative economic views/proposals thus receive little coverage.

There’s an abundance of economic ideas which fall outside orthodox framing. The main difficulty is ploughing through them to find the ones which seem neither “crackpot” nor scary. Here are a few of my favourites…

Universal Basic Income (UBI)

A Basic Income is an income paid to all individuals, without work requirement or means test (which is what places it far outside conventional economic “wisdom”). People are free – but not obliged – to top it up with income from other sources, eg self-employment or jobs. Over the last two centuries this idea has been independently proposed under a variety of names – Citizen’s Income, Universal Benefit, State Bonus, Social Credit and National Dividend.

Several ways have been suggested to fund a Basic Income. Nobel prize-winning economist James Meade proposed a social dividend funded from the return on publicly owned productive assets. Some economists think that funding should come from redistributive income taxation or a tax on land. These ideas aren’t new – as far back as 1796, Thomas Paine favoured a state-provided universal income to compensate for the inequitable division of land, which he saw as belonging to everyone.

The Basic Income concept makes good bait to dangle in economic conversations. The uninitiated, taking the bait, will argue that it would remove the incentive to work, and nurture an “idle underclass”. In fact, compared to the existing welfare system, Basic Income provides a strong financial incentive for creative and productive activity (some recent research lends empirical support to this). With Basic Income it’s more financially rewarding to move from unemployment into a job – because you keep your Basic Income payments, whereas you would lose your dole. Many common types of work – eg low-paid casual, part-time or self-employed work – increase your disposable income under a Basic Income scheme, whereas the income from such work is subtracted from your dole under the current system. Many worthwhile activities – adult education, voluntary work, starting a business, etc – are penalised or even criminalised under the current welfare system, because they interfere with the condition of “continuous availability for work.” Most wealth-creating activity begins modestly, perhaps not generating enough for a person to survive on at first. Basic Income nurtures such activity, whereas the welfare system aborts it.

Guaranteed Income

Guaranteed Income is sometimes confused with Basic Income, but the important difference is that it uses a means test. Every individual is guaranteed a minimum income (set above the poverty level) – if your income falls below this level, you automatically get a top-up from the government, but as your personal income increases, the amount of top-up decreases. Guaranteed Income, like Basic Income, is not conditional upon work.

Several variations of Guaranteed Income have been proposed, the most well-known being Robert Theobald’s 1964 scheme for “Basic Economic Security”. Theobald was concerned about the effect of technology and increasing automation – he thought it was time to dissolve the traditional link between income and work, since most work would eventually be automated. By 1968, 1,200 economists (including John Kenneth Galbraith) called on Congress to introduce such a system. A Guaranteed Income in fact almost made it into legislation, under a proposal put forward by – wait for it – Richard Nixon. A book was written about it in 1973, by Daniel Patrick Moynihan (who was appointed to Nixon’s White House Staff as Counselor to the President for Urban Affairs). His book was titled: The Politics of a Guaranteed Income: The Nixon Administration and the Family Assistance Plan (1973).

Negative Income Tax

One variation on Guaranteed Income is the Negative Income Tax, which would provide government top-ups, via the tax system, to those below a certain income level. It should be pointed out to those who see this as a “soft” leftist idea, that Negative Income Tax was proposed by one Milton Friedman. In many ways, we’re outside the right/left framing dichotomy here. Friedman’s apparent intention was to create a system that costs less than the current welfare system (but which also avoids the degrading nature of welfare).

Willingness to Work?

Many so-called “guaranteed minimum income” schemes restrict entitlement, among the unemployed, to those “willing to work” – a condition similar to that of current welfare systems. The Belgian political theorist Philippe Van Parijs argues that when we assess willingness-to-work, we should make the distinction between pointless, dead-end jobs and useful, fulfilling or “stepping stone” jobs – and that the best people to make this distinction are the ones doing the jobs. This is in stark contrast to conventional economic framing, in which all market-created jobs are viewed as “good” and “worthwhile” – by definition.

Zero-interest Currency

A different type of non-coercive redistribution of wealth comes from the old Individualist (as opposed to Collectivist) Anarchist approach of allowing free trade to drive down the cost of “borrowing” money. This idea originated with early anarchists such as Pierre-Joseph Proudhon, Josiah Warren and Benjamin Tucker.

Free trade is supposed to drive down prices through open competition, but according to Proudhon, Warren and Tucker there is a fundamental flaw in the existing system: a lack of competition in the issuance of currency. The current legally enforced money-issuing monopoly (eg the Bank of England or the Federal Reserve) keeps interest at an artificially high level – if free competition were allowed in the creation and distribution of alternative currencies, the cost of credit could in theory fall to a rate well below 1% (the cost of administering the credit; true interest would be zero).

Ironically, this appears to be “true” free-market economics taken to its logical conclusions. The anarchists claimed that zero-interest currency would eventually remove all forms of usury, including “profit”, from economic transactions. Adam Smith’s principle of “labour being the true measure of price” would thus come into effect through free competition driving out all usurious components of price. Workers would be fully compensated for their work at last, and not a Marxist or Collectivist in sight.

Rusting bank notes – Stamp Scrip

“I believe that the future will learn more from the spirit of Gesell than from that of Marx”— John Maynard Keynes

In 1891 an Argentinian businessman and economist named Silvio Gesell went one step further than the Individualist Anarchists by proposing a system of negative-interest currency. The most well-known form of this currency was “stamp scrip”, which required a stamp to be affixed to the back of a money note each month, to revalidate it.

Gesell believed that money is fine as a medium of exchange, but that it tends to be used as an instrument of power, capable of dominating and distorting the market. For example, money can be hoarded – temporarily withheld from the market for speculative purposes – without exposing its holder to losses. Real material goods, on the other hand, can’t be hoarded without significant costs – either in the natural deterioration of the goods, or in the cost of storage.

In order to encourage the natural circulation of wealth instead of speculative hoarding, Gesell proposed “rusting bank notes” (a metaphor for negative-interest money), to bring about an “organic reform” of the monetary system. With money behaving more like real material wealth, the distortions in the system caused by hoarding and other forms of usury would be removed. This, he argued, would result in people receiving the full proceeds of their own labour, and would enable large sections of the population to quit wage slavery and work in an autonomous manner in private and co-operative enterprises.

A successful experiment with Gesell’s theories took place in the Austrian town of Wörgl in 1932, during the depression. Wörgl effectively ran out of money, so the mayor of the town printed his own. The resulting currency, Wörgl stamp scrip, was designed to automatically earn negative interest. Each month its holders had to pay a stamp fee of 1% of the value of the note, so people spent the money as fast as possible. This resulted in a huge increase in “real wealth” – new houses, a new water system, repaved streets, a new bridge, a ski jump, etc. But when hundreds of other Austrian towns came up with plans to copy the successful Wörgl scheme, the central bank panicked because of the threat to its monopoly. It soon became illegal to issue alternative currency in Austria.

The Digital Economy

Apart from the possibility of alternative electronic currencies, the “digital economy” hasn’t delivered much of revolutionary economic impact (except in the sense of concentrating wealth more “efficiently”). The first electronic money-trading system was opened by Reuters in 1973, shortly after the dismantling of the gold standard and the Bretton Woods system (which regulated international currencies). From earliest records up until then, 90% of capital transactions had involved the “real economy”, ie trade and investment, with only 10% being speculation. By 1995 a staggering reversal had taken place – trade and investment accounted for only 5% of capital transfers, with 95% being short-term speculation.

Electronic trading networks have developed a virtual economy in which most of the money is made not through actual investment, but through transacting in a sort of abstract wealth. For example, huge profits have been made from rumours about indirect effects of future transactions – but the future transactions don’t necessarily have to happen for the profits to be made. Massive profits have been made from currency speculation, conjured up by supercomputers which transact fast enough to exploit microfluctuations in exchange rates.

Very little of this virtual-economy profiteering produces anything of value in the sense of “real wealth” – ie things of real value to human lives. Short-term financial speculation tends to create economies of high profit, low investment and low wages – in other words, it’s detrimental to the lives of most people. We have some strange notions about the respectability of certain types of income. When poor people receive modest welfare payments, they’re labelled “spongers”, but when speculators bleed vast sums from the digital economy, without producing anything of value, we congratulate them on their skill.

The Tobin Tax

James Tobin, a Nobel laureate economist, foresaw the detrimental effects of escalating currency speculation during the 1970s. He proposed a small tax on foreign currency transactions that would put “sand in the wheels” of international speculative finance, and thus help to prevent instability in the global financial system. It would also generate a vast amount of revenue.

This idea has resurfaced as an Internet phenomenon, the Robin Hood Tax.

Final thought to ponder (on Guaranteed Income)

“A system that is less expensive than welfare and also less debasing to the poor, it seems to me, should not be objectionable to anybody but hardcore sadists.”
— Robert Anton Wilson

* Quoted in Whoops! by John Lanchester. Johnson’s figures are for USA.** Description of financial sector as “class of priests and magicians” is from Whoops! by John Lanchester
*** Much of the above article is adapted from a piece I had published in the Idler magazine, Winter 2002